Executive summary
Airlines industry is marked by innovations and dynamism. With technological advancement, increased attractiveness of the industry and increasing liberalization in airlines industry, have made the airline industry highly competitive. The low cost carrier industry is going through its best growth phases presently. With level of competition is increasing with every airline company trying to gain share of profit from this industry. Price wars are increasing. To offer the services in a cost effective manner, the challenge faced by the low cost airlines is to reduce their operating costs. The companies adopt different strategies based on their product and service offering in order to achieve cost efficiency. This paper discusses the case of the low cost airlines company, Air Asia. The challenges and opportunities of the company are evaluated. The environmental factors are found to have a strong impact on the strategic decisions of the company, the differentiation and positioning strategies, the strategies to gain cost effectiveness and significance of application of technology.
Introduction
Air Asia is Malaysian low-cost airline headquartered near Kuala Lumpur, Malaysia. Air Asia is the largest low cost airlines operator in the South Eastern Asia region. The target customers of the company are local and international travelers who look for economic fares when travelling and their demands for frills and luxuries is low. Cost is a major determining factor for these customers. Air Asia caters to this customer segment as it offers value for money. to be competitive, it is important for the company to evaluate and understand the macro and micro environmental factors in the airlines industry and their impact on the performance of the company. The paper focuses on discussing the macro-environmental factors facing Air Asia by conducting a PESTEL analysis. The competitive analysis is conducted using Porter’s five forces model. Also, a SWOT analysis is conducted to analyse the strengths, weaknesses, opportunities and threats of Air Asia. Based on the understanding of these analyses, the impact of these factors on the company is discussed.
PESTEL analysis
The macro-environmental factors impact all the companies in an industry. PESTEL analysis is used to develop an understanding of macro-environmental factors like political, legal, economic., social, technological and environmental factors in the industry.
Political factors:
The political environment and stability impacts the attractiveness of an industry in a country. The countries in which Air Asia operated have relatively stable political environment. Malaysia has strong international business ties and strategies with the foreign markets, especially with the regional economies. The Malaysian government is proactive in developing business alliances with the foreign countries which is beneficial for the growth of industries (Country Profile: Malaysia, 2007).
Legal factors:
The legal and regulatory aspects strongly regulate the way in which airlines companies operate. Some of the major legal aspects that airlines companies need to follow are employment laws, health and safety laws, aviation laws, etc. (Oyewole, et.al., 2007). The challenge for the airlines companies arise from the fact that different countries have different laws and the companies have to abide by each one of them when operating.
Economic factors:
Rate of economic growth, exchange rate, interest rates, and inflation rates are the major economic factors that affect performance of any industry. The Malaysian economy and the other regional economies are growing (Country Profile: Malaysia, 2007). The Asia Pacific region is one of the fastest growing regions globally. Economic risks are low. The growing middle class and their increased purchasing power have indicated a positive trend for the airlines industry. Moreover, economic slowdowns have reflected that there is an increasing tendency of the travelers to switch to low cost airlines and avoid full service airlines.
Social factors:
Increasing middle class and their increasing disposable income are the major drivers of increasing demand for low cost airlines (Country Profile: Malaysia, 2007). Changing social aspects are reflected in the changing customer preferences and attitudes towards different types of services provided by the airlines companies has helped in the growth of the low cost airlines industry in the last decade. Changing lifestyle of people is increasing the number of leisure travelers who are increasingly opting for economic airlines services to fit their low budget travel plans (Oyewole, et.al., 2007).
Technical factors:
With advancement of communication infrastructure, companies are increasingly making their presence strong in the online medium. Booking airlines tickets an also hotel and taxi bookings are increasingly being made online. This has also improved the communication of the company with its customers (Buckstein 2010). Development of physical infrastructure and airlines even in the tier 2 cities has increased the penetration of airlines companies. Increase in Research and Development in the airlines industry has been instrumental in constant innovations in the industry to meet the changing customer needs and preferences and increased competition.
Environmental factors:
Increasing awareness and concerns about the environmental factors has led the airlines companies to be conscious about the issues of air pollution, and other environmental impacts of airlines services (Oyewole, et.al., 2007).
SWOT analysis of Air Asia
Porter’s five forces analysis on Air Asia
The competitive environment of the airline industry can be evaluated using Porter’s five forces model that evaluates the five factors namely, threat of new entrants, bargaining power of buyers, bargaining power of suppliers, internal rivalry and substitutes.
Threat of new entrant:
Liberalization has increased opportunities for the companies to enter the industry. But the airlines industry is highly regulated and capital intensive industry. The government regulations in this industry are very stringent. For example, the airlines companies landing in Malaysian airports have to sign a MOU. So, the possibilities of entrance of new companies in the industry are low (Golaszewski, 2009).
Bargaining power of Buyers:
The major buyers of the low cost airlines services are the customers looking for quality, value for money, safety and convenience (Akbar, & Abdullah 2010). Air Asia caters to this segment of customers. As price is the primary determinant of the airlines services for this customer segment, the customers switch to the competitors of Air Asia if they offer services at a lower price. The switching cost for the customers is low (Golaszewski, 2009); thus their bargaining power is high.
Bargaining power of suppliers:
There are only a few suppliers in the airlines industry. Boeing and Airbus are the primary suppliers of aircrafts. Usually all airlines purchase aircrafts from either of these companies in order to ensure the cost of maintaining the aircrafts is low. The switching costs of the companies from one supplier to another are very high. So, suppliers have higher bargaining power.
Substitutes:
Air travel can be substituted by travel through roadways and railways, or even waterways. But when customers look for a combination of convenience, time effective and value for money, low cost airlines is one of the best alternatives that they can have. So, though customers may prefer to use railways and roadways for travelling short distances, the threat for substitutes for long distance travels is very less (Shaw, 2007).
Competitive rivalry:
The level of competition in the airlines industry is very high. Air Asia faces competition from both low cost airlines companies and also full service airlines companies. The major domestic competitor of Air Asia is Malaysian Airlines (Akbar, & Abdullah 2010). In the regional market, the major competitors of Air Asia are Tiger Air, Thai Airways, Singapore Airlines, Qantas Airways, and Indigo.
Impact on AirAsia
The corporate strategy, business strategy, marketing mix, and competencies of a company are developed based on the analysis of the macro and micro environmental factors (Penner, 2009). These evaluations help Air Asia in developing high quality, highly efficient sustainable aviation services. The challenges for the company lie in its ability to be able to manage the risks effectively (Pustay, 2002).
Air Asia follows a low cost strategy in an attempt to differentiate itself from the competitors. Being in service oriented industry, there is inherent need for service expectations from the employees of the company. Customer service is an increasing challenging issue in case of low cost airlines. Aria Asia has faced customer complaints often. This tends to cause the customers to switch loyalties to other airlines companies. This can act as a strategic disadvantage for the company (Shaw, 2007).
The airlines industry is heavily dependent on the fuel prices for operating their aircrafts. Increasing fuel prices globally directly impacts the operations of the company (Fly me, I'm cheap the price of flying on a low-cost airline, 2002). So, it is extremely important for the management of Air Asia to optimize the flying routes and destinations in order to minimize their fuel expenses and improve cost efficiency. Irrespective of the demands at different locations, the company chooses its destinations based on the strategy of optimizing routes. APEC has been able to establish the Multilateral Agreement on the Liberalisation of International Air Transportation (MALIAT) among the regional economies, the level of participation of the companies is low. Moreover, the cost constraint of Air Asia restricts it to explore all the destinations that enjoys the facilities of the agreement.
A major weakness of the company lies in its own MRO (maintenance, repair and overhaul) facility which often tends to cause problems for the company.
Being a market leader in low cost airlines industry, Air Asia has a strong brand image and high brand recognition. With liberalization of markets, though the opportunities for the company has increased, the no frills aspect of service, service issues, high maintenance costs and customers’ perception of safety issues in low cost airlines pose as hindrances in the success of the company.
It is important for the company to maintain string relationships with the governments of the countries where it operates (Shaw, 2007). The effectiveness of the top management of Air Asia plays an important role in the development and implementation of the strategic plans which has helped the company gain leadership position in the in South East Asia and Asia Pacific regions. Using a single type of aircraft from only a single supplier helps the company to gain cost efficiency.
Use of information technology has made the company’s operations cost and time effective. The company is increasingly using technology for the functions like customer services, ticket bookings, and also marketing campaigns (Air Asia benefits from using technology in its branding efforts, 2010). The company appropriately uses technological advancements to reduce costs and increase operational efficiency. The positioning strategy of the company as low cost airlines is based on the analysis of the changing patterns of customer demands for economic travel options. This has helped the company develop its niche in the highly competitive airlines industry (Air Asia benefits from using technology in its branding efforts, 2010).
Air Asia has a strong research support that helps the company understand the changing demand patterns, customer habits and preferences. This helps the company to remain competitive even in tough times.
Air Asia considers its employees as a crucial asset for the company (BBC News, 2010). It ensures diversity in the workforce as the company has airlines travelling to a multiple locations.
Conclusion
Air Asia operates in a dynamic industry that places high weightage on quality of service and superiority in technology. The major focus of the company is gaining cost efficiency. So, to gain competitive advantage it is important for the company to conduct a thorough environmental analysis for the company. The paper conducted and evaluated the macro and micro- environmental factors by conducting PESTEL analysis, SWOT analysis, and Porter’s five forces model. Based on the analysis the impacts of the factors on the company are identified. In response to the environment analysis, the strategies that Air Asia adopts to improve its competitive position are setting up smaller yet profitable network and opt out from operating in non profitable routes to help improve cost efficiency. The alliances with other airlines companies and being part of agreements can help the company to penetrate untapped markets more conveniently. Recruiting skilled employees and optimally staffing the organisation, can help in improving customer service and gaining customer loyalty within the cost constraints.
References
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